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Welcome SUNDAY, JANUARY 10, 2010

Satyam: Survival secrets

Overview  This article analyzes Satyam in the period of organiational crisis following thedramatic disclosure by its Mr Ramalinga Raju. It was widely speculated in themedia that, among other things, the company would most likely disintegrate in amatter of days. However, the company did hold on and was doing well onserveral of the parameters, even before the takeover by Tech Mahindra.

The section 1,2 provides the background of the issue and section 3 describes the

questions/challenges the were posed by the crisis. The section 4 lists some key

observations in this period, and section 5 forms the central part of the disucssion

wherein these observations are analyzed to arrive at the causative factors.

1.Introduction 

This blog analyzes the conditions of uncertainty affecting the organization, andthe observable pattern of responses in the immediate aftermath of the incident.The observation period for the pattern of responses is four months, i.e. until May,2009.

Focus

The following are the key focus areas:1. Filling in the leadership vacuum: What led to the emergence of a leadershipteam, at a time when the organization was headless?2. Employee Motivation: What kept the employees motivated, and productive?3. Employee Attrition: Why was the attrition rate lower than expected?

About SatyamSatyam is a leading global business and information technology servicescompany, delivering consulting, systems integration, and outsourcing solutions toclients in numerous industries across the globe.Satyam leverages deep industry and functional expertise, leading technology

practices, and an advanced, global delivery model to help clients transform their highest-value business processes and improve their business performance.

Satyam was incorporated as private limited company in 1987, and has beenrated as the fourth largest IT services firm in India.

2.Crisis unfolds

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The ShockIn one of the biggest frauds in India's corporate history, B. Ramalinga Raju,founder and Chairman of Satyam Computers announced on January 7, 2009 thathis company had been falsifying its accounts for years, overstating revenues and

inflating profits by $1 billion.

This revelation shocked the shareholders, clients, employee and the entirebusiness community. The stock value plunged by about 77%, taking with it agreat amount of shareholder wealth.

Satyam had been in the news for the wrong reasons for over three weeks prior tothis disclosure. This was due to the botched attempt to invest $1.6 billion inMaytas Properties and Maytas Infra, two firms promoted and controlled bymembers of the Chairman’s family. On December 16, Satyam's board clearedthe investment, sparking a negative reaction by investors, who pummelled its

stock on the New York Stock Exchange and Nasdaq. The board hurriedlyreconvened the same day and called off the proposed investment.

3. The Immediate Aftermath: Questions posed

The rest of this article attempts to analyze these questions, based on observablebehaviour patterns and an interpretation of outcomes. The observations andinferences drawn are entirely empirical in nature.

Who is in charge?Within 48 hours of the Maytas controversy, resignations streamed in from

Satyam's non-executive director and Harvard professor of businessadministration Krishna Palepu and three independent directors -- MangalamSrinivasan, a management consultant and advisor to Harvard's Kennedy Schoolof Government; Vinod Dham, called the "father of the Pentium chip" and nowexecutive managing director of NEA Indo-US Ventures in Santa Clara, Calif.; andM. Rammohan Rao, the dean of the Indian School of Business in Hyderabad(ISB).

The board strength had reduced to six, from the original figure of ten. Of theremaining six, only three were independent directors, two were executivedirectors (Ramalinga Raju and Rama Raju), and one full-time director (Ram

Mynampati)

With the resignation of Ramalinga Raju (Chairman) and Rama Raju (MD) onJanuary 7th, the strength had come down to four leaving only one full-timedirector in Ram Mynampati (President).

On January 8th, the CFO, Srinivas Vadlamani had also sent in his resignation.To make matters worse, it was widely believed that Ramalinga Raju and the CFO

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were not in contact with the rest of the organisation. This meant that even if asecond layer were to rise up to pick the reins, there was hardly any directionavailable.

This situation posed serious questions as to who was in charge. How would the

company overcome this leadership vacuum?

Will the crisis affect business service delivery?At the time of the crisis, Satyam was serving over 650 global clients, of which180 were Fortune 500 corporations. The incidents of the past two weeksculminating in the resignation had sent shock waves through the clients of Satyam, given that most of the service delivery that it does were on mission-critical client systems and processes. Some of these clients had been engagingSatyam for more than a decade, and had entered into exclusive outsourcingprojects.

It was feared that the employee attrition, low morale, leadership uncertainties,and the precarious financial position would impact the delivery service levels.

4. The ObservationThis section provides three empirical observations which form the basis of theanalysis in the remainder of the document.

Observation 1: Leadership successionWithin 36 hours of the resignation of the Chairman and MD, a group of 6 leadersaddressed a press conference. They called themselves the ‘Task Force’, andrepresented the key vertical units, geographical units, delivery units and support

units. This group of leaders presented a unified, coherent face while respondingto the probing questions of the media.

Less than 2 days of the incident, the uncertainty on the leadership vacuumseemed to get lesser. This was a semblance of stability, but only for the most optimistic yet.

Observation 2: Increased productivitySoon after the incident came to light, Forrester Research had predicted thatabout 30% of Satyam clients are likely to review their contracts with thecompany. Some companies such as Coca Cola and State Farm Insurance did

sever their contracts. Others such as Nestle, FIFA, Ciba, Oracle, and Nissan hadpublically gone on record reposing their faith in the beleaguered IT giant.

By early February, many of the clients sighed in relief when they noted that theservice levels were not affected as feared. The clients, who eventually severedtheir ties, did so out of considerations other than delivery service levels in theobservation period.

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The productivity and throughput (and thus motivation) had actually increased inthis period.

Observation 3: Lower attrition (than feared)On March 23, Kiran Karnik (new government appointed Chairman) stated that

the company lost nearly 3,500 of its staff since the resignation of Mr Raju, whichhe clarified, was normal for a company of this size.

In relative terms, this ‘normal attrition rate’ was only 6%, as against an industryaverage between 15-20%.Interestingly, the attrition rate was not as high as was feared.

5. The Analysis 

Filling in the Leadership vacuumIn this section, we look into the reasons that could have helped the organisationsteer clear of the forces of instability encountered in a typical leadership vacuum.The leadership succession in this context is studied in its larger sense, at theorganisational level, and not just the upper layer which was physically renderedvoid by the event of January 7th.

Full Life Cycle Business Model Beginning 2005, Satyam transformed its business model completely, seeking toretain the entrepreneurial spirit that generates innovation without sacrificingquality in the face of phenomenal growth-from 100 employees in 1992 to more

than 40,000. The spirit of this design was a conscious departure from the widelyaccepted change from the organic to mechanistic model that an entrepreneurialorganisation undergoes as it scales up.The key to this transformation was the concept of ‘Full Life Cycle Business(FLCB)’, and the ‘Full Life Cycle Leader (FLCL)’. This design enabled thedevelopment and empowerment of leaders from within the ranks who could actwith independence and authority, akin to an entrepreneur or CEO of anindependent business.

Each FLCB had a business leader, called the Full Life Cycle Leader who hasend-to-end responsibility for managing and growing the business. The business

ranges from a few projects (minimum annual revenue of $3 million USD) to thebusiness as represented by an entire regional or vertical. The FLCL, typically,belongs to the Band B or above.

The key factors that differentiate this design from that of a standard servicescompany is both in the nature of the autonomy provided to the individual, thesheer number of such individuals, and also in the underlying entrepreneurialspirit.

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during this period of crisis. Thus instead of one CEO, there were nearly 1800CEOs on the task of resurrection.

Senior leadershipAt the organisational level, a core Leadership team emerged. This was the team

that comprised 6 senior, long time executives in charge of separate vertical andregional businesses. This leadership team filled in the vacuum that was leftbehind by the resignation of the Chairman and MD. In part, it can behypothesized that the long term succession planning had a role to play in thissmooth transition.

Motivating the employeesThe higher levels of motivation observed in this period cannot be explained usingthe standard motivation theories, such as those proposed by Vroom, the Porter-Lawrence model or the other reward based theories. This is in part due to the

special nature of the circumstances which effectively eliminates the concept of expectancy (correlation between effort, job performance and expected rewardsas a motivator) and valence (importance of the outcome) from any discussionson motivation of the average Satyam employee during this time. For the averageemployee, the performance-to-output expectancy under these circumstances is,arguably, close to zero.

One model that can be used to explain this is the motivation theory as modifiedto include the aspects of affiliation (i.e. value of relationships) and extension (i.e.call of a super-ordinate goal, especially under pressure situations), especially

from the unique Indian context of the situation.

In this section, the role played by the affiliation and extension motivators isdescribed.

 Affiliation motive

The affiliation motive is characterized by the value placed on relationships. Thisaffiliation motive can be further divided into four categories in the Satyamcontext,

1.Vertical: This is fostered by the relations that the employees enjoy with their superiors and subordinates. This is the most formal of all internal affiliations.2.Horizontal: The HR practices such as B-Channel (buddy referral program),Group Induction process for entry and lateral levels, and various social

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networking activities had a big role to play in the setting up the horizontalaffiliation motivators.a) Buddy referral: Satyam had been using buddy referral to a great deal of success. This process brings in a part of the employees social network within theorganisation, which is beneficial in terms of performance and attrition.

b)Group Induction: The group induction process has an effect on establishing theidentity of the individual with the group. This process has a tremendous impacton the individual during the rest of his career with the organisation, as explainedin a subsequent section.3.Client affiliation: The concept of FLCB, by which the team takes on a greater ‘business’ perspective and alignment with the client, provided the basis for theclient affiliations. Most of these clients have been with the company for quitesome time, and the personal relations were quite strong.4.Corporate affiliation: This is the affiliation that the employees associate with thecorporate, although in the current situations one would hypothesize on thedilution of this motivator.

Extension motiveIn the Indian context, it is common to observe superior-subordinate relationshaving a certain, sometimes subdued, filial component. A popular studyconducted by Wharton (‘DNA of Indian leadership’) stresses the fact that Indianleaders tend to focus more on internal issues on people management andemployee motivation (as opposed to their western counterparts who focus to alarge extent on the balance sheet and clients).

In India, the concept of un-employment welfare and state support is non-existent.Hence one of the desired attributes of a job is its promise of relative permanence

(though the high growth industries are generally not the best examples of thistrend). Accordingly, by the extension motive, for most leaders and middle levelmanagers, it was imperative that they ensure theirs and their team’s job securityby increasing the performance and keeping the client relations intact. This is asuper-ordinate goal, above their official line of duty.

The extension motive is also manifested in the energy and passion that wasunmistakable across the rank and file of the leadership. The leaders were

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spending more time at work, with employees, and with clients – all intended tocontribute their bit to the task of resurrection, a greater common purpose at thathour.

An interesting observation in this regard is that Satyam has never been known to

lay off any of its staff through the greater part of its history, although there wereindications that this policy would have to change post January 7.

Managing AttritionIn order to understand the lower than expected levels of attrition, it is important tounderstand some of the HR practices linked to socialization and networkingwhich have a pronounced effect even under normal circumstances.

In this section, these measures related to group identity, the common pledge andthe role of communication is analyzed.

Group Identity In Satyam, and in many other high growth companies, the volumes handled inrecruitment are quite high. Consequently, the induction process is usuallyconducted in formal groups and typically takes between three to six months. Toentry level employees who are just out of college, this is a very uniqueexperience and is in many ways an extension of collegiate life, but with all theperks of a corporate employee.

It has been generally observed that the cohesiveness of this group is quite high;many years after the individual members have undergone the orientationprocesses and separated ways (such as deputed to different offices/units within acity, different cities in India, different worldwide locations). A crucial aspect to benoted here is that these groups are more in the lines of ‘affinity groups’ andhence are not characterized by frictions and polarizations caused by routinetransactional issues as one would encounter in a ‘work group’. It can thus besafely interpreted that these groups have only a positive effect on the individuals,and that there is direct correlation between the years of service, cohesivenessand the organizational productivity emanating from the members of these groups.

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Predictably, this group cohesiveness and identity would increase during timessuch as that experienced by Satyam. This has a positive effect on productivity,as depicted below.

The effect of this group identity on attrition is even more interesting. It wasobserved that most of the employees had by the first few hours of the issue got intouch with the members from their work groups and affinity groups, andcontinued to do so on a regular basis. The ensuing behaviour exhibited all thetypical symptoms of groupthink think such as:1. Aspect of vulnerability: Most Satyam employees disregarded the doomsdaypredictions in the media, and kept their confidence on the fundamentals of thecompany high. This behaviour was strengthened by the slow and gradualprocess of cultural reinforcement over the years, and the access to the primarysources of information during this crisis.2.Aspect of unanimity: It was observed that the solidarity between employeesincreased to new levels in this period. As an example, many teams had reportedthat there was a significant decrease in the mundane squabbles (such asbetween Onsite/ Offshore, delivery and finance teams), which one would expectin large enterprises.3.Aspect of common enemy: The employees in general were convinced thatthe media had a very dubious role in propagating incorrect, unchecked rumours.The setting up of a common enemy had the positive effect of cushioning theemployee moral from the mindless charade enacted out in the media.4.Aspect of self-censorship of deviations: While all this was going on, surelythere were sceptics how didn’t doubt the doomsday predictions. But, as a code of conduct, they had exercised restraint in airing their doubts, and in many teamsthere was a pledge undertaken by members to abstain from speculating on theissue except during the breaks.In contemporary management literature, the role of groupthink is, quite rightly,portrayed in poor light as in such cases the quest for unanimity overrides themotivation to realistically appraise alternative courses of action. However, in theSatyam incident it should be noted that groupthink had a positive effect due tothe extra-ordinary nature of the circumstances.

Cascading pledge

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In another interesting development, the 6 member task force, and the 20 member Leadership Council pledged to remain with Satyam. These were typicallyemployees from the senior most levels of Vice President and Senior President.This pledge was taken almost with 48 hours of the incident, and was to have afar-reaching effect.The image of their senior leaders committed to the cause of 

business continuity, inspired similar downstream behaviour from the employees.

HR and Management CommunicationCommunication is perhaps the most important aspect of managing such asituation. The organisation needs to ensure that correct and timely informationreaches all employees, and that the sources of rumours and internal speculationare arrested to the extent possible. In the case of Satyam, the quality of communication and the credibility was also supported by the fact that theemployees in the HR unit, like the others, were in a state similar to the rest of theorganisation.To this effect, the management implemented a communication channel that

linked all ‘team leaders’ in direct contact with the Head of HR through amaximum of three levels. The communication network that developed in thisphase was a hybrid of the circular and chain network.

Increase in Transparency An interesting effect of this issue on the corporate communication was theperceived increase in transparency. The employees noted that the managementwas making no attempt to sugar-coat the issue, and was very objective in itsinternal communication. There were none of those ‘Comical Ali statements’ of defiant rhetoric (' We are in Control' !), as added in jest by a senior Satyamite atthat time. The questions on salary disruption, provident fund contributions etc.

were dealt in the most appropriate and honest way; conspicuous by its absencewas kind of the ‘creative managerial license’ generally associated with suchsituations.It could be interpreted that the preceived onset of transparency in theproceedings, contributed in some way, to taking the sting out of the employeefrustration.The management also made a conscious decision not to respond to the barrageof ‘lies and unchecked rumours’ that were doing the rounds in the print andelectronic media. This, in hindsight, was a wise decision as by not reacting to themedia, the management was signalling its priorities and its complete disregardfor the rumour mongering.

4. Endnote/ ConclusionThe analysis presented above points to the role of leadership pipeline, distributedleadership model, affiliation and extension motivators, group identities,socialization and communication in stabilizing the company during this period of unprecedented crisis.As explained in the previous section, some of these behaviours/ observationscontradict the established theories, while some others reinforce them. While

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making a judgement, it should be noted that the period of observation is relativelyshort, and the context to which the frameworks have been applied ischaracterized by chaos and organizational dysfunction. Also, some of theseinferences need to be overlayed with the economic context of that time.

This analysis can be further qualified and reinforced by inspecting the abovementioned parameters for a longer period of time.

Posted by Shishya at 8:20 AM 

2 comments:

Prashanth said...

Excellent article - completely agree with you as an ex-Satyamite

September 6, 2010 11:47 PM

Nikhil said...

excellent !!!

September 28, 2010 10:27 AM

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